Notice2021-20448
Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change To Amend Rules 7.31, 7.35, 7.35B, 7.35C, 98, and 104 Relating to the Closing Auction
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 22, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 86 Issue 181 (Wednesday, September 22, 2021)</title>
</head>
<body><pre>
[Federal Register Volume 86, Number 181 (Wednesday, September 22, 2021)]
[Notices]
[Pages 52719-52731]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-20448]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93037; File No. SR-NYSE-2021-44]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change To Amend Rules 7.31, 7.35,
7.35B, 7.35C, 98, and 104 Relating to the Closing Auction
September 16, 2021.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on September 3, 2021, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rules 7.31 (Orders and Modifiers),
7.35 (General), 7.35B (DMM-Facilitated Closing Auctions), 7.35C
(Exchange-Facilitated Auctions), 98 (Operation of a DMM Unit), and 104
(Dealings and Responsibilities of DMMs) relating to the Closing
Auction. The proposed rule change is available on the Exchange's
website at <a href="http://www.nyse.com">www.nyse.com</a>, at the principal office of the Exchange, and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rules 7.31 (Orders and Modifiers),
7.35 (General), 7.35B (DMM-Facilitated Closing Auctions), 7.35C
(Exchange-Facilitated Auctions), 98 (Operation of a DMM Unit), and 104
(Dealings and Responsibilities of DMMs) relating to the Closing
Auction.\4\
---------------------------------------------------------------------------
\4\ Capitalized terms used in connection with Auctions on the
Exchange are defined in Rule 7.35(a).
---------------------------------------------------------------------------
Overview of Current Closing Auction Process
The following rules currently describe the Closing Auction process
on the Exchange: Rule 7.31 (identifying the order types eligible to
participate in an Auction); Rule 7.35 (general rules and definitions
applicable to Auctions); Rule 7.35B (describing the process for DMM-
facilitated Closing Auctions); Rule 7.35C (describing the process for
Exchange-facilitated Auctions); and Rule 104 (establishing DMM
obligations with respect to Closing Auctions and trading leading into
the Closing Auction).
The following interest is eligible to participate in a Closing
Auction:
<bullet> Unexecuted buy and sell orders resting on the Exchange
Book at the end of Core Trading Hours (including DMM Orders); \5\
---------------------------------------------------------------------------
\5\ For purposes of Auctions, the term ``DMM Interest'' is
defined in Rule 7.35(a)(9) to mean all buy and sell interest entered
by a DMM unit in its assigned securities and includes the following:
(i) ``DMM Auction Liquidity,'' which is non-displayed buy and sell
interest that is designated for an Auction only (see Rule
7.35(a)(9)(A)); (ii) ``DMM Orders,'' which are orders, as defined
under Rule 7.31, entered by a DMM unit (see Rule 7.35(a)(9)(B)); and
(iii) ``DMM After-Auction Orders,'' which are orders entered by a
DMM unit before either the Core Open Auction or Trading Halt Auction
that do not participate in an Auction and are intended instead to
maintain price continuity with reasonable depth following an Auction
(see Rule 7.35(a)(9)(C)).
---------------------------------------------------------------------------
<bullet> Auction-Only Orders; \6\ and
---------------------------------------------------------------------------
\6\ Auction-Only Orders available for the Closing Auction are
defined in Rule 7.31(c)(2)(A)-(D) as the Limit-on-Close Order (``LOC
Order''), Market-on-Close Order (``MOC Order''), Closing D Order,
and Closing Imbalance Offset Order (``Closing IO Order'').
---------------------------------------------------------------------------
<bullet> DMM Auction Liquidity entered by the DMM in connection
with facilitating the Closing Auction.\7\
---------------------------------------------------------------------------
\7\ The Commission recently approved proposed changes to Rule
7.35B that provide that Floor Broker Interest is no longer eligible
to participate in the Closing Auction. See Securities Exchange Act
Release No. 92480 (July 23, 2021), 86 FR 40886 (July 29, 2021) (SR-
NYSE-2020-95) (``Floor Broker Interest Approval Order''). The term
``Floor Broker Interest'' is defined in Rule 7.35(a)(10) to mean
orders represented orally by a Floor broker at the point of sale.
In light of the Floor Broker Interest Approval Order, the
Exchange is proposing conforming changes to Rule 7.35B(j)(2) and
subparagraph (A)(iii) to that Rule. Specifically, Rule 7.35B(j)(2)
provides that, to avoid closing price dislocation that may result
from an order entered into Exchange systems or represented to a DMM
orally at or near the end of Core Trading Hours, the Exchange may
temporarily suspend the requirement to enter all order instructions
by the end of Core Trading Hours. Because the Exchange has
eliminated Floor Broker Interest at the close, the Exchange proposes
to delete the phrase ``or represented to a DMM orally'' in Rule
7.35B(j)(2). For similar reasons, the Exchange proposes to delete
the phrase ``and Floor Broker Interest'' in Rule
7.35B(j)(2)(A)(iii).
---------------------------------------------------------------------------
Beginning 10 minutes before the scheduled end of Core Trading
Hours, the Exchange begins disseminating through its proprietary data
feed Closing Auction Imbalance Information that is calculated based on
the interest eligible to participate in the Closing Auction.\8\ The
Closing Auction Imbalance Information includes the Continuous Book
Clearing Price, which is the price at which all better-priced orders
eligible to trade in the Closing Auction on the Side of the Imbalance
can be traded.\9\ The Closing Auction Imbalance Information also
includes an Imbalance Reference Price, which is the Exchange Last Sale
Price bound by the Exchange BBO.\10\ Beginning five minutes before the
end of Core Trading Hours, Closing D Orders are included in the Closing
Auction Imbalance Information at their undisplayed discretionary
price.\11\ The Closing Auction Imbalance Information is updated at
least every second, unless there is no change to the information, and
is disseminated until the Closing
[[Page 52720]]
Auction begins.\12\ In addition, if at the Closing Auction Imbalance
Freeze Time \13\ the Closing Imbalance \14\ is 500 round lots or more,
the Exchange will disseminate a Regulatory Closing Imbalance to both
the securities information processor and proprietary data feeds.\15\
---------------------------------------------------------------------------
\8\ See Rule 7.35B(e)(1)(A). DMM Orders, as defined in Rule
7.35(d)(9)(B), that have been entered by the DMM in advance of a
Closing Auction are included in the Closing Auction Imbalance
Information.
\9\ See Rule 7.35(a)(4)(C). In the case of a buy Imbalance, the
Continuous Book Clearing Price would be the highest potential
Closing Auction Price and in the case of a sell Imbalance, the
Continuous Book Clearing Price would be the lowest potential Closing
Auction Price.
\10\ See Rule 7.35B(e)(3).
\11\ See Rule 7.35(b)(1)(C)(ii).
\12\ See Rule 7.35(c)(1) and (2).
\13\ See Rule 7.35(a)(8) (defining the ``Closing Auction
Imbalance Freeze Time'' to be 10 minutes before the scheduled end of
Core Trading Hours).
\14\ As defined in Rule 7.35(a)(4)(A)(ii), a ``Closing
Imbalance'' means the Imbalance of MOC and LOC Orders to buy and MOC
and LOC Orders to sell. That Rule further defines a ``Regulatory
Closing Imbalance'' as a Closing Imbalance disseminated at or after
the Closing Auction Imbalance Freeze Time.
\15\ See Rule 7.35B(d)(1).
---------------------------------------------------------------------------
The Exchange begins accepting Auction-Only Orders for the Closing
Auction at 6:30 a.m. Eastern Time and they can be entered and cancelled
without restriction until 10 minutes before the scheduled end of Core
Trading Hours. If a Regulatory Closing Imbalance has not been
published, during the Closing Auction Imbalance Freeze the Exchange
will reject all MOC and LOC Orders. If a Regulatory Closing Imbalance
has been published, during the Closing Auction Imbalance Freeze the
Exchange will accept MOC and LOC Orders opposite the Side of the
Regulatory Closing Imbalance and will reject MOC and LOC Orders on the
Side of the Imbalance.\16\ In addition, from the beginning of the
Closing Auction Imbalance Freeze until two minutes before the scheduled
end of Core Trading Hours, MOC, LOC, and Closing IO Orders may be
cancelled or reduced in size only to correct a Legitimate Error, and
requests to cancel such orders in the last two minutes of trading will
be rejected.\17\ Closing D Orders can be entered or cancelled without
restriction until 10 seconds before the scheduled close of trading, at
which point, a request to either enter or cancel, cancel and replace,
or modify a Closing D Order will be rejected.\18\
---------------------------------------------------------------------------
\16\ See Rule 7.35B(f)(1)(A) and (B).
\17\ See Rule 7.35B(f)(2)(A) and (B).
\18\ See Rule 7.35B(f)(3).
---------------------------------------------------------------------------
Pursuant to Rule 104(a)(3), Designated Market Makers (``DMM'') have
the responsibility to facilitate the close of trading for each of the
securities in which the DMM is registered as required by Exchange
rules, which may include supplying liquidity as needed. Rule 104(a)(3)
further provides that DMMs and DMM unit algorithms have access to
aggregate order information in order to comply with their requirement
to facilitate the close of trading for each of the securities in which
the DMM is registered. Accordingly, aggregate order information about
all orders eligible to participate in the Closing Auction, including
the full quantity of Reserve Orders \19\ and MOC and LOC Order
quantities, are available to DMMs at each price point. This information
is available at the point of sale to DMMs. In addition, it is made
available to DMM unit algorithms in connection with the electronic
message sent to a DMM unit algorithm to close an assigned security
electronically, which is sent shortly after the end of Core Trading
Hours.
---------------------------------------------------------------------------
\19\ Reserve Orders, including the non-displayed reserve
interest of such orders, are eligible to participate in the Closing
Auction. See, e.g., Rule 7.35B(h)(2)(B) (describing the allocation
ranking of at-priced orders ranked Priority 3--Non-Displayed Orders,
which refers to the reserve interest of Reserve Orders).
---------------------------------------------------------------------------
Rule 7.35B specifies the process for DMM-facilitated Closing
Auctions. Pursuant to Rule 7.35B(a), it is the responsibility of each
DMM to ensure that registered securities close as soon after the end of
Core Trading Hours as possible, while at the same time not unduly
hasty, particularly when at a price disparity from the Exchange Last
Sale Price.\20\ As provided for in Rule 7.35B(a)(2), a DMM may enter or
cancel DMM Interest after the end of Core Trading Hours in order to
supply liquidity as needed to meet the DMM's obligation to facilitate
the Closing Auction in a fair and orderly manner, and entry of DMM
Interest after the end of Core Trading Hours is not subject to Limit
Order Price Protection. Pursuant to Rule 7.35B(c), the DMM may
effectuate a closing manually or electronically. Rule 7.35B(g) provides
that the DMM is responsible for determining the Auction Price for a
Closing Auction and that if there is an Imbalance of any size, the DMM
must select an Auction Price at which all better-priced orders on the
Side of the Imbalance can be satisfied.
---------------------------------------------------------------------------
\20\ The term ``Exchange Last Sale Price'' is defined in Rule
7.35 to mean the most recent trade on the Exchange of a round lot or
more in a security during Core Trading Hours on that trading day,
and if none, the Official Closing Price from the prior trading day
for that security.
---------------------------------------------------------------------------
Rule 7.35C specifies the process for Exchange-facilitated Auctions
if a DMM cannot facilitate an Auction in one or more securities in
which the DMM is registered. DMM Interest does not participate in an
Exchange-facilitated Closing Auction trade.\21\
---------------------------------------------------------------------------
\21\ See Rule 7.35C(a)(1) (``If the Exchange facilitates an
Auction, DMM Interest will not be eligible to participate if such
Auction results in a trade, and will be eligible to participate if
such Auction results in a quote.'')
---------------------------------------------------------------------------
Proposed Amendments to Rules 7.31, 7.35, 7.35B, and 7.35C
The Exchange proposes to amend Rules 7.31, 7.35, and 7.35B to
revise the DMM-facilitated Closing Auction process. The proposed
changes would modify how the Closing Auction Price would be determined
and how DMMs would be able to participate in the Closing Auction, but
would not change their Rule 104 obligation to facilitate the Closing
Auction, including to supply liquidity as needed. The Exchange believes
that the proposed changes would make the Closing Auction more
transparent and deterministic, while still retaining the DMMs' unique
obligation to facilitate the Closing Auction.
The Exchange also proposes to make conforming changes to Rule 7.35C
to revise the orders eligible to participate in Exchange-facilitated
Closing Auctions.
Proposed Changes to Closing Auction Price. The Exchange proposes to
amend Rule 7.35B(g) to add explicit price parameters to the Closing
Auction Price. As noted above, the DMM is responsible for determining a
Closing Auction Price that is able to satisfy all better-priced orders
on the Side of the Imbalance. This requirement would not change. The
Exchange proposes to add that the Closing Auction Price determined by
the DMM must also be at a price that is at or between the last-
published Imbalance Reference Price and Continuous Book Clearing Price.
Specifically, the Exchange proposes to amend Rule 7.35B(g) as follows
(proposed changes italicized):
(g) Determining an Auction Price. The DMM is responsible for
determining the Auction Price for a Closing Auction under this Rule. If
there is an Imbalance of any size[,]:
(1) The DMM must select an Auction Price at which all better-priced
orders on the Side of the Imbalance can be satisfied; and
(2) if the Side of the Imbalance is to buy (sell), the Auction
Price must be at or above (below) the last-published Imbalance
Reference Price and not above (below) the last-published non-zero
Continuous Book Clearing Price.
The Exchange believes that adding this proposed Closing Auction
Price parameter is consistent with how the Closing Auction Price has
been determined for the vast majority of Closing Auctions. For example,
in the period January 1, 2021 to July 23, 2021, 96.5% of all Closing
Auctions were priced at or between the last-published Imbalance
Reference Price and Continuous Book Clearing Price. Similarly, during
this same period, 94.9% of closing auction volume priced within these
parameters. The Exchange further believes that this proposed change
would eliminate any potential
[[Page 52721]]
for a Closing Auction Price to be lower (higher) than the last-
published Imbalance Reference Price in the case of a Buy (Sell)
Imbalance. This proposed change would also promote transparency and
determinism with respect to the Closing Auction because the Closing
Auction Price would be required to be within a pre-determined range of
prices that have been disseminated via the Closing Auction Imbalance
Information and that cannot be changed after the end of Core Trading
Hours.\22\
---------------------------------------------------------------------------
\22\ The only circumstance when the Continuous Book Clearing
Price could change after the end of Core Trading Hours would be if
Rule 7.35B(j)(2)(A), described below, were invoked and the
requirement to enter all order instructions by the end of Core
Trading Hours were temporarily suspended for a security.
---------------------------------------------------------------------------
Proposed Changes to How DMMs Would Participate in the Closing
Auction. The Exchange proposes to change how DMMs would be able to
enter buy and sell interest to participate in the Closing Auction by
limiting the circumstances of when a DMM could enter or cancel interest
after the end of Core Trading Hours.
Currently, Rule 7.35B(a)(2) provides that a DMM may enter or cancel
DMM Interest after the end of Core Trading Hours in order to supply
liquidity as needed to meet the DMM's obligation to facilitate the
Closing Auction in a fair and orderly manner. Consistent with this
current Rule, the Exchange does not block a DMM from entering or
cancelling DMM Interest after the end of Core Trading Hours. Instead,
the DMM's determination of whether to enter or cancel DMM Interest
after the end or Core Trading Hours is subject to the DMM's obligation
to maintain a fair and orderly market, as specified in Rule 104.
The Exchange proposes to amend Rule 7.35B(a)(2) to provide that
after the end of Core Trading Hours, a DMM may enter only DMM Auction
Liquidity and only if such interest would offset any Unpaired Quantity
at the Closing Auction Price. With this change, DMMs would be
systematically restricted with respect to the side, price, and quantity
of the DMM Auction Liquidity that they may enter after the end of Core
Trading Hours. Because DMM Auction Liquidity would have priority over
at-priced Yielding Orders (described in more detail below), the
Exchange further proposes that offsetting at-priced Yielding Orders
would not be included in the calculation of the Unpaired Quantity that
a DMM may offset with DMM Auction Liquidity. With these proposed
changes, a DMM could enter DMM Auction Liquidity after the end of Core
Trading Hours only to close a security at a price that is at or closer
to the Imbalance Reference Price than the published Continuous Book
Clearing Price.\23\ The Exchange proposes to systematically enforce
this new requirement and block any DMM buy and sell interest that does
not meet these new requirements.
---------------------------------------------------------------------------
\23\ For example, if there is an Imbalance to buy, the Imbalance
Reference Price is $10.00, and the Continuous Book Clearing Price is
$10.10, the DMM could enter DMM Auction Liquidity to sell only at
prices ranging from $10.10 to $10.00 and only if there is Unpaired
Quantity at such prices. If the DMM determines to close that
security at $10.03 and there is Unpaired Quantity to buy of 1,000
shares at that price (excluding at-priced offsetting Yielding Orders
to sell), the DMM could enter DMM Auction Liquidity to sell up to
only 1,000 shares.
---------------------------------------------------------------------------
The Exchange proposes to cancel DMM Orders (i.e., DMM buy and sell
orders resting on the Exchange Book) at the end of Core Trading Hours
because it also proposes that DMM Orders would not be eligible to
participate in the Closing Auction.\24\ Therefore DMM Orders would not
be included in the Auction Imbalance Information for the Closing
Auction. The Exchange also proposes to eliminate the ability of a DMM
to cancel any DMM Interest after the end of Core Trading Hours. To
effect these changes, the Exchange proposes to amend Rule 7.35B(a)(2)
as follows (proposed additions italicized, proposed deletions
bracketed): \25\
---------------------------------------------------------------------------
\24\ The Exchange also proposes to amend Rule
7.35B(j)(2)(A)(iii) to provide that DMM Orders would be rejected if
entered after the end of Core Trading Hours (i.e., during the
``Solicitation Period'') to offset an extreme order imbalance at or
near the close.
\25\ As a related change, because DMM Orders would no longer be
either participating in the Closing Auction or included in the
Closing Auction Imbalance information, the Exchange proposes to
amend Rule 7.35(b)(1)(D) to specify that the references to DMM
Interest and the Imbalance Reference Price in that Rule would be
applicable only if DMM Interest would be included in the Core Open
or Trading Halt Auction Imbalance Information.
---------------------------------------------------------------------------
(2) DMM Interest: A DMM may enter [or cancel] DMM Auction
Liquidity[Interest] after the end of Core Trading Hours [in order]only
to [supply liquidity as needed to meet the DMM's obligation to
facilitate the Closing Auction in a fair and orderly manner]offset any
Unpaired Quantity at the Closing Auction Price. Offsetting at-priced
Yielding Orders will not be included in the calculation of the Unpaired
Quantity that a DMM may offset with DMM Auction Liquidity. The entry of
DMM Auction Liquidity[Interest] after the end of Core Trading Hours
will not be subject to Limit Order Price Protection. DMM Orders will
not be eligible to participate in the Closing Auction, will not be
included in the Auction Imbalance Information for the Closing Auction,
and will be cancelled at the end of Core Trading Hours.
With this proposed change to Rule 7.35B(a)(2), DMMs would have
fewer tools available to manage the risk of the DMM leading into the
Closing Auction, particularly since their DMM Orders would
automatically be cancelled before the Closing Auction and they would be
systematically restricted with respect to the side, price, and quantity
of DMM Auction Liquidity that they may enter after the end of Core
Trading Hours. Yet, as required by their obligations in Rule 104, in
connection with the Closing Auction, DMMs would still be required to
contribute their own capital to supply liquidity as needed to assist in
the maintenance of a fair and orderly market. In addition, DMMs would
continue to have an obligation with respect to determining a Closing
Auction Price that satisfies all better-priced orders on the Side of
the Imbalance.
In recognition of both the continued obligations of DMMs with
respect to the Closing Auction and their ongoing need to manage the
risk of the DMM leading into the Closing Auction, the Exchange proposes
to provide DMMs with different tools to participate in the Closing
Auction. Specifically, the Exchange proposes to make the existing
Closing D Order type available to DMMs. Currently, only Floor brokers
may enter Closing D Orders. To enable DMMs to enter Closing D Orders,
the Exchange proposes to amend Rule 7.31(c)(2)(C)(i) to provide that a
Closing D Order may be entered only by a Floor broker or DMM. The
Exchange proposes that Closing D Orders would function for DMMs in a
similar manner as they currently function for Floor brokers, with the
following differences:
First, the Exchange would not offer the Yielding Modifier to DMMs,
and therefore a Closing D Order entered by the DMM could not include a
Yielding Modifier.\26\ Accordingly, the Exchange proposes to amend Rule
7.31(c)(2)(C)(iii) to add the clause ``entered by a Floor broker'' to
make clear that adding a Yielding Modifier to a Closing D Order would
be available only to Floor brokers.
---------------------------------------------------------------------------
\26\ The Yielding Modifier is not necessary for DMMs because
their transactions on the Exchange are as a dealer acting in the
capacity as a market maker, and therefore they are not subject to
the trading prohibitions specified in Section 11(a) of the Act. 15
U.S.C. 78k(a)(1) and 15 U.S.C. 78k(a)(1)(i).
---------------------------------------------------------------------------
Second, unlike Closing D Orders in NYSE-listed securities entered
by a Floor broker, Closing D Orders entered by a DMM in NYSE-listed
securities would not be able to participate in a
[[Page 52722]]
Core Open Auction or Trading Halt Auction.\27\ As currently set forth
in Rule 7.31(c)(2)(C)(ii), on arrival, a Closing D Order is processed
as a Limit Order and may trade or route prior to the Closing Auction,
which means that such orders are eligible to trade both in continuous
trading and in Auctions prior to the Closing Auction. Because the
purpose of providing Closing D Orders to DMMs is to provide them with a
tool to participate in Closing Auctions, the Exchange does not believe
that Closing D Orders entered by DMMs in NYSE-listed securities would
need to participate in a Core Open Auction or Trading Halt Auction on
the Exchange. To effect this proposed difference, the Exchange proposes
to add the following text to Rule 7.31(c)(2)(C)(ii):
---------------------------------------------------------------------------
\27\ The Exchange does not propose this difference for Closing D
Orders entered by DMMs in UTP Securities as such orders would be
routed for participation in an opening or reopening auction on the
primary listing market and DMMs would not have a unique role in
those auctions. By contrast, because DMMs have a parity allocation
in Core Open Auctions and Trading Halt Auctions, the Exchange
believes it would simplify Exchange rules to provide that such
orders would not participate in Exchange Core Open and Trading Halt
Auctions.
provided that a Closing D Order entered by a DMM in an NYSE-listed
security will not be eligible to trade in a Core Open Auction or
Trading Halt Auction. The Exchange will reject a Closing D Order
that is sent by a DMM in an NYSE-listed security either before the
Core Open Auction or during a trading halt or pause, provided that
the Exchange will accept such orders beginning ten minutes before
the scheduled end of Core Trading Hours even if the security remains
halted or paused or never opened. The Exchange will cancel a Closing
D Order entered by a DMM in an NYSE-listed security if the security
is halted or paused earlier than 10 minutes before the scheduled end
---------------------------------------------------------------------------
of Core Trading Hours.
The reason why the Exchange would accept, or not cancel, a Closing
D Order entered by a DMM in the last ten minutes of trading is because,
as provided for in Rule 7.35(d), the Exchange will not open or reopen a
security that has not yet opened or is halted or paused and will not
transition to continuous trading if such opening or reopening would be
in the last ten minutes of trading before the end of Core Trading
Hours. Instead, the Exchange will remain unopened, halted, or paused
and will close the security as provided for in the Rule 7.35 Series.
Because in these circumstances, the Exchange would proceed to a Closing
Auction, the Exchange proposes to accept (or not cancel) Closing D
Orders entered by DMMs in NYSE-listed securities during this ten-minute
period, even if the security is in a halt state during that period.
Except for these differences, Closing D Orders entered by DMMs
would function the same as they do for Floor brokers, including that:
<bullet> Entry of such orders can begin at 6:30 a.m. (Rule
7.34(a)(1)).
<bullet> Such orders can be entered in any securities trading on
the Exchange, including a UTP Security,\28\ and the DMM can provide
instruction of whether a Closing D Order in a UTP Security would be
routed to the primary listing market as either a MOC or LOC Order (Rule
7.31(c)(2)(iv)).
---------------------------------------------------------------------------
\28\ The term ``UTP Security'' is defined in Rule 1.1 to mean a
security that is listed on a national securities exchange other than
the Exchange and that trades on the Exchange pursuant to unlisted
trading privileges.
---------------------------------------------------------------------------
<bullet> Such orders would be included in the Closing Auction
Imbalance Information at their undisplayed discretionary price
beginning five minutes before the end of Core Trading Hours (Rule
7.35(b)(1)(C)(ii)).
<bullet> Beginning 10 seconds before the scheduled close of
trading, a request to enter a Closing D Order in any security or to
cancel, cancel and replace, or modify such order in an Auction-Eligible
Security would be rejected (Rule 7.35B(f)(3)).
The Exchange further proposes to exclude Closing D Orders entered
by a DMM from the definition of ``DMM Orders'' in Rule 7.35(a)(9)(B).
With this change, the proposed reference to DMM Orders in the amendment
to Rule 7.35B(a)(2) would not include Closing D Orders, and therefore,
Closing D Orders entered by a DMM would not be cancelled at the end of
Core Trading Hours. The Exchange also proposes a clarifying change to
Rule 7.35(a)(9)(C) to provide that DMM After-Auction Orders means ``DMM
Orders,'' and not just ``orders.'' With this change, the definition of
DMM After-Auction Orders would similarly not include Closing D Orders
entered by a DMM. The Exchange also proposes to delete the phrase ``as
defined under Rule 7.31'' in Rule 7.35(a)(9)(C) as unnecessary because
the defined term ``DMM Orders'' already references Rule 7.31.
The Exchange believes that providing DMMs with the ability to enter
Closing D Orders in their assigned securities would provide them with a
replacement mechanism both to supply liquidity as needed for the
Closing Auction, as required by Rule 104(a)(3), and to manage the risk
of the DMM leading into the Closing Auction, in a manner that is more
transparent and deterministic than the current process. Specifically,
the Exchange proposes that Closing D Orders entered by a DMM would be
included in the Closing Auction Imbalance Information at their
undisplayed discretionary price beginning five minutes before the end
of Core Trading Hours, which is when Closing D Orders entered by Floor
brokers are included in the Closing Auction Imbalance Information.\29\
With this change, Closing D Orders entered by DMMs would be reflected
in the Closing Auction Imbalance Information, which is not the case for
DMM Interest currently entered or cancelled after the end of Core
Trading Hours. Market participants would be able to respond to any
changes in the Closing Auction Imbalance Information that may result
from Closing D Orders entered by DMMs by entering interest into the
continuous order book or retaining the services of a Floor broker to
enter Closing D Orders on their behalf.\30\
---------------------------------------------------------------------------
\29\ See Rule 7.35(b)(1)(C)(ii).
\30\ As today, the Closing Auction Imbalance Information would
not identify the source of orders included in the Continuous Book
Clearing Price, including whether an order is entered by a DMM,
Floor broker, or other member organization.
---------------------------------------------------------------------------
Moreover, because Closing D Orders entered by DMMs would function
similarly to Closing D Orders entered by Floor brokers, and would not
be permitted to be entered or cancelled in the last ten seconds of
trading, the manner by which the Continuous Book Clearing Price would
be determined would be the same as today and would not change in the
last ten seconds due to the entry of a Closing D Order. In addition,
because DMMs could not enter or cancel any new interest after the end
of Core Trading Hours (other than offsetting interest), the potential
range of Closing Auction Prices would no longer be able to be changed
by a DMM after the end of Core Trading Hours.
The Exchange further believes that providing DMMs with the ability
to enter Closing D Orders in all securities that trade on the Exchange,
including UTP Securities, would generally support the maintenance of a
fair and orderly market in securities traded on the Exchange by
providing for a mechanism for DMMs to enter such orders directly.
Currently, a DMM may choose to use a Floor broker to enter Closing D
Orders in securities that have not been assigned to that DMM. The
Exchange believes that allowing DMMs to enter Closing D Orders directly
would reduce operational complexity and cost for DMMs, thereby creating
an incentive for additional firms to register as a DMM. This proposed
change would also make it easier for regulatory staff to monitor DMM
trading activity on the Exchange.
The Exchange also believes that providing DMMs with the ability to
[[Page 52723]]
enter Closing D Orders in all securities that trade on the Exchange
would serve as an incentive for additional broker-dealers to register
as a DMM on the Exchange. Currently, there are numerous costs
associated with becoming a DMM. For example, before being approved to
operate as a DMM, among other things, a firm must develop and implement
DMM-specific technology designed to interface with Exchange systems
consistent with the obligations under Rule 104 (e.g., to maintain depth
and continuity in assigned securities and to facilitate Auctions both
manually and electronically); hire, train, and maintain staff on the
Trading Floor; and develop and implement policies and procedures and
surveillances designed to comply with DMM-specific rules (e.g., Rules
36, 98, and 104).\31\ The Exchange understands that in the past, to
justify incurring such upfront costs, firms would not register as a DMM
firm unless they had certainty that once they started operations as a
DMM, they would have had a roster of listed securities allocated to the
firm. In the past, this has been achieved by a new entrant acquiring an
existing DMM firm, with the new firm being allocated the listed
securities previously allocated to the acquired firm. In the absence of
such opportunities, which would arise only if an existing firm seeks to
exit the DMM business, the Exchange believes that providing potential
new DMM entrants with additional opportunities to provide liquidity
across all securities that trade on the Exchange may serve as an
incentive for new entrants to undertake the costs to register as a DMM
unit without a significant roster of allocated securities. The Exchange
believes that additional DMMs would promote diversity of DMMs on the
Exchange, providing greater choice to issuers when selecting the DMM
that would be assigned to their securities.
---------------------------------------------------------------------------
\31\ Pursuant to Rule 98(c)(1), to operate a DMM unit, a member
organization must obtain approval from the Exchange. To obtain
approval, among other things, the DMM unit must maintain and enforce
written policies and procedures consistent with Rule 98 requirements
relating both to protecting material non-public information
generally, and more specifically to protecting against the misuse of
Floor-based non-public order information.
---------------------------------------------------------------------------
DMM Interest Allocation in the Closing Auction. Because of the
changes to what type of DMM interest would be eligible to participate
in a Closing Auction, the Exchange proposes to change how much such DMM
Interest would be allocated in a Closing Auction, as described in Rule
7.35B(h), as follows:
First, the Exchange proposes to amend Rule 7.35B(h)(1) to provide
that better-priced Closing D Orders--whether entered by a Floor broker
or a DMM--would be guaranteed to participate in the Closing Auction
(subject to DMM allocation self-trade prevention, described below). The
Exchange believes that because DMMs would be entering Closing D Orders
before the end of Core Trading Hours and such interest would be
included in the Closing Auction Imbalance Information, if they are
better-priced orders, they should be included in the Closing Auction in
the same manner that all other better-priced orders entered by other
member organizations are allocated in the Closing Auction. The Exchange
does not consider this a benefit for DMMs because all better-priced
interest is guaranteed to participate in the Closing Auction.\32\
Therefore, DMMs would not receive a different allocation opportunity
from other participants for such better-priced Closing D Orders.
---------------------------------------------------------------------------
\32\ See Rule 7.35B(h)(1).
---------------------------------------------------------------------------
Second, the Exchange proposes to amend Rule 7.35B(h)(2)(A) to
provide that at-priced Closing D Orders entered by a DMM in securities
that are assigned to that DMM would be included in the DMM Participant
\33\ for purposes of a parity allocation. Rule 7.35B(h)(2) currently
provides that at-priced orders and DMM Interest of any price are not
guaranteed to participate in the Closing Auction. The Exchange proposes
that at-priced Closing D Orders would also not be guaranteed to
participate in the Closing Auction. In addition, current Rule
7.35B(h)(2)(A) further provides that orders ranked Priority 2--Display
Orders, which include DMM Interest, are ranked on parity by Participant
pursuant to Rule 7.37(b)(2)-(7). Accordingly, currently, at-priced DMM
Interest is allocated on parity by DMM Participant in the Closing
Auction. The Exchange therefore believes that ranking at-priced Closing
D Orders entered by a DMM in its assigned securities on parity by DMM
Participant would not be novel. The distinction from current rules,
however, would be that Closing D Orders would be required to be entered
before the end of Core Trading Hours. By contrast, under the current
rules, DMMs could receive a parity allocation of at-priced DMM Interest
entered after the end of Core Trading Hours.
---------------------------------------------------------------------------
\33\ Under Rule 7.36(a)(5), the term ``DMM Participant'' means
the DMM assigned to the security. Accordingly, a DMM is eligible for
a DMM Participant parity allocation only in securities assigned to
that DMM.
---------------------------------------------------------------------------
In addition, proposed Rule 7.35B(h)(2)(A) would provide that at-
priced Closing D Orders entered by a DMM in securities not assigned to
that DMM would be included in the Book Participant. This allocation
methodology would be new because, currently, a member organization
acting in its capacity as a DMM is not permitted to enter orders in
securities that are not assigned to it. Because a member organization
entering orders in NYSE-listed securities not assigned to it in its
capacity as a DMM would not be functioning as a DMM, the Exchange
proposes that such at-priced Closing D Orders be included in the Book
Participant \34\ for purposes of parity allocations in the Closing
Auction.
---------------------------------------------------------------------------
\34\ Under Rule 7.36(a)(5), the term ``Book Participant'' means
orders collectively represented in the Exchange Book that have not
been entered by a Floor broker or DMM. Pursuant to Rule 7.37(b)(5),
an allocation to the Book Participant will be allocated to orders
that comprise the Book Participant by working time.
---------------------------------------------------------------------------
Third, the Exchange proposes to amend Rule 7.35B(h)(2) to add new
subparagraph (E) providing that DMM Auction Liquidity, i.e., the
offsetting interest that a DMM would be permitted to enter after the
end of Core Trading Hours in connection with facilitating the Closing
Auction and that would always be at-priced interest, would be allocated
after both LOC Orders and Closing IO Orders.\35\ This would be new,
because currently, all at-priced DMM Interest, including that entered
after the end of Core Trading Hours, would be allocated before at-
priced LOC Orders and Closing IO Orders. As described above, the
Exchange proposes that only at-priced interest entered by a DMM before
the end of Core Trading Hours, i.e., Closing D Orders, would be
allocated before LOC Orders and Closing IO Orders. However, that would
not be a unique benefit because currently, all displayed and non-
displayed orders, including Closing D Orders entered by Floor brokers,
are allocated before LOC Orders and Closing IO Orders. Accordingly,
DMMs would not receive a unique benefit with this allocation sequence.
---------------------------------------------------------------------------
\35\ The Exchange proposes a non-substantive amendment to re-
number current Rules 7.35B(h)(2)(E) and (F) as proposed Rules
7.35B(h)(2)(F) and (G).
---------------------------------------------------------------------------
As proposed, DMM Auction Liquidity, which can be entered only after
the end of Core Trading Hours, would be allocated after the following
at-priced orders have any opportunity to participate in the Closing
Auction: orders ranked Priority 2--Displayed Orders and Closing D
Orders; orders ranked Priority 3--Non-Display Orders; LOC Orders; and
Closing IO Orders. As further proposed, among at-priced orders, DMM
Auction Liquidity would
[[Page 52724]]
receive an allocation opportunity before orders ranked Priority 4--
Yielding Orders and Closing D Orders with a Yielding Modifier. The
Exchange believes that this allocation would be consistent with a fair
and orderly market because orders with a Yielding Modifier are, by
their terms, conditional, intended to yield to other available
interest, and not guaranteed an execution in the Closing Auction.
As noted above in connection with the discussion relating to
proposed amendments to Rule 7.35B(a)(2), because DMM Auction Liquidity
would be allocated ahead of Yielding Orders, the Exchange would not
include offsetting at-priced Yielding Orders in the calculation of the
Unpaired Quantity that would be provided to DMMs to let them know the
full quantity of DMM Auction Liquidity that they would be eligible to
trade at a price point. In addition, because the Exchange proposes to
change how DMM Auction Liquidity would be ranked and allocated in a
Closing Auction, the Exchange proposes to amend the second sentence of
Rule 7.35(a)(9)(A) \36\ to specify that the ranking and allocation of
DMM Auction Liquidity, as described in that Rule, would be applicable
only for a Core Open Auction or Trading Halt Auction.
---------------------------------------------------------------------------
\36\ The second sentence of Rule 7.35(a)(9)(A) currently
provides that ``[f]or purposes of ranking and allocation in an
Auction, DMM Auction Liquidity is ranked Priority 2--Display
Orders.''
---------------------------------------------------------------------------
Finally, the Exchange proposes to amend Rule 7.35B(h)(3)(A)
relating to DMM Participant allocation. The current rule addresses how
DMM Orders would be allocated within the DMM Participant.\37\ Because
DMM Orders would no longer participate in the Closing Auction, the
Exchange proposes to delete the current rule text. The Exchange
proposes that Rule 7.35B(h)(3)(A) would instead address how the
Exchange would apply self-trade prevention within the DMM Participant
Allocation.
---------------------------------------------------------------------------
\37\ Current Rule 7.35B(h)(3)(A) provides: ``At-priced DMM
Orders will be placed on the allocation wheel for the Closing
Auction based on the time of entry and any other orders or interest
from such DMM will join that position on the allocation wheel. If
the only DMM Interest available to participate in a Closing Auction
is DMM Auction Liquidity or better priced DMM Orders or both, such
DMM Interest will be placed last on the allocation wheel.''
---------------------------------------------------------------------------
As noted above, a DMM would not be able to enter or cancel Closing
D Orders in the last ten seconds of Core Trading Hours. In addition,
DMMs would be permitted to enter DMM Auction Liquidity after the end of
Core Trading Hours, and only to offset Unpaired Quantity at the Closing
Auction Price. Accordingly, it could be possible that a DMM has a
Closing D Order to buy (sell) that is eligible to participate in the
Closing Auction when there is a buy (sell) Unpaired Quantity, and
therefore the DMM may be entering offsetting DMM Auction Liquidity to
sell (buy). If the prices of two such contra-side orders either lock or
cross, the Exchange proposes to apply STP Decrement and Cancel
(``STPD''), as described in Rule 7.31(i)(2)(C)(i), to such locking/
crossing interest.\38\ The Exchange believes that by applying STPD, the
Exchange would systematically ensure that DMM Auction Liquidity would
not trade in a Closing Auction where there are also contra-side Closing
D Orders entered by the DMM.\39\ It would also ensure that only the
equivalent size of the two orders would be cancelled. Therefore, such
cancellation would have minimal impact on how the Closing Auction Price
would be determined. The Exchange further proposes that if there is
more than one Closing D order to sell (buy) to be cancelled, such
orders would be cancelled in price/time sequence, from lowest (highest)
price first, and then at each price, from oldest to newest.
---------------------------------------------------------------------------
\38\ Under Rule 7.31(i)(2)(C)(i), STPD works as follows: ``if
both orders are equivalent in size, both orders will be cancelled
back to the originating member organization. If the orders are not
equivalent in size, the equivalent size will be cancelled back to
the originating Client ID and the larger order will be decremented
by the size of the smaller order with the balance remaining on the
Exchange Book.''
\39\ As described above, the STPD functionality would be
implemented for DMMs as a tool to help enable them to meet their
obligations to facilitate the Closing Auction in a fair and orderly
manner while systematically preventing the DMM from engaging in
certain trading activity such as ``wash sales.'' The Exchange notes
that it does not propose to implement self-trade prevention for all
market participants in the Closing Auction, rather only for the
limited case of DMM Auction Liquidity entered after the end of Core
Trading Hours. Because the Closing Auction is a single transaction
involving many different participants at a single clearing price, it
would be difficult to implement this functionality from a
technological and operational perspective across multiple parties
and all other types of auction interest because it would require the
Exchange to continually provisionally cancel and recalculate the
prospective auction.
---------------------------------------------------------------------------
Exchange-Facilitated Auctions. Rule 7.35C(a)(1) currently provides
that if the Exchange facilitates an Auction, DMM Interest will not be
eligible to participate if such Auction results in a trade and will be
eligible to participate if such Auction results in a quote. The
Exchange proposes that because, as described above, Closing D Orders
entered by DMMs would be processed similarly to Floor broker Closing D
Orders, including that they would be included in Closing Auction
Imbalance Information, Closing D Orders entered by a DMM be processed
similarly to Closing D Orders entered by Floor brokers in an Exchange-
facilitated Auction. Accordingly, the Exchange proposes to amend Rule
7.35C(a)(1) to provide that Closing D Orders entered by a DMM would be
eligible to participate in an Exchange-facilitated Closing Auction.
Proposed Amendments to Rules 104 and 98
Prohibited Transactions. In connection with the above-described
changes to the process for DMM-facilitated Closing Auctions, the
Exchange proposes to amend Rule 104 to eliminate the current
restriction on DMMs engaging in ``Prohibited Transactions'' during the
last ten minutes of trading prior to the scheduled close of trading.
The Exchange believes that the proposed changes to the Closing Auction
process obviate the need for this current restriction and the Exchange
proposes to delete the text currently set forth in Rule 104(g)(1)(B)
and subparagraph (i) thereto in its entirety.
Rule 104(g)(1)(A) currently defines an ``Aggressing Transaction''
as a DMM unit transaction that: ``(i) is a purchase (sale) that reaches
across the market to trade as the contra-side to the Exchange published
offer (bid); and (ii) is priced above (below) the last differently-
priced trade on the Exchange and above (below) the last differently-
priced published offer (bid) on the Exchange.'' Rule 104(g)(1)(B)
further provides that:
Aggressing Transactions during the last ten minutes prior to the
scheduled close of trading that would result in a new high (low)
price for a security on the Exchange for the day at the time of the
DMM's transaction are prohibited, unless such transaction would
match another market's better bid or offer price, bring the price of
that security into parity with an underlying or related security or
asset, or would liquidate or decrease the position of the DMM
unit.\40\
---------------------------------------------------------------------------
\40\ Rule 104(g)(1)(B) defines the ``position of the DMM unit''
for purposes of Rule 104(g)(1)(B) as ``the DMM unit's inventory of
securities exclusive of pending, unexecuted orders and has the same
meaning as `net position information in DMM securities' in Rule
98(c)(5).''
These are referred to as ``Prohibited Transactions.'' When the
Exchange previously sought to remove Prohibited Transactions, the
Commission disapproved the proposed rule change and noted that it
analyzed the proposal ``in the context of the unique role played by
DMMs on the Exchanges.'' \41\
[[Page 52725]]
In assessing the DMM's benefits and obligations with respect to the
close, in the Disapproval Order, the Commission reiterated that it
assesses ``whether the rewards granted to DMMs . . . are commensurate
with their obligations'' and whether Exchange rules reflect ``an
appropriate balance of DMM obligations against the benefits provided to
DMMs.'' With respect to that proposed rule change, the Commission found
that ``[i]n return for their obligations and responsibilities, DMMs
have significant priority and informational advantages in trading on
the Exchanges, both during continuous trading and during the closing
auction.'' Among other things, the Commission noted that ``during the
Auction itself, DMMs are aware of interest represented by Floor
brokers, which is not publicly disseminated.'' The Commission further
noted that ``when offsetting an imbalance during the closing auction,
DMM interest trades at parity with limit orders on the Exchange order
book, and DMM interest takes priority over limit-on-close orders with a
price equal to the closing price and over closing-offset orders.''
---------------------------------------------------------------------------
\41\ See Securities Exchange Act Release No. 81150 (July 1,
2017), 82 FR 33534, 33536 (July 20, 3017) (SR-NYSE-2016-71)
(``Disapproval Order''). The Exchange has since amended Rule 104 to
revise how Prohibited Transactions function on the Exchange. See
Securities Exchange Act Release No. 85637 (April 12, 2019), 84 FR
16079 (SR-NYSE-2018-34) (Order approving amendments to Rule 104,
including modifying the definition of prohibited transactions)
(``Prohibited Transactions Approval Order'').
---------------------------------------------------------------------------
Since 2017, the Exchange has implemented changes relating to
trading functions on the Exchange leading into the Closing Auction that
have altered the balance of DMM obligations against the benefits
provided to DMMs. First, in 2019, in connection with the transition to
the Pillar trading platform, the Exchange amended its rules to provide
that Floor Broker Interest (i.e., interest verbalized in the trading
crowd by a Floor Broker) would be included in Closing Auction Imbalance
Information.\42\ Accordingly, from August 2019, when Pillar was
implemented, until March 2020, when the Trading Floor was temporarily
closed as a precaution to prevent the spread of COVID-19, the
information available to DMMs regarding Floor Broker Interest became
available to subscribers of the Closing Auction Imbalance Feed.
---------------------------------------------------------------------------
\42\ See Rule 7.35B(a)(1)(B).
---------------------------------------------------------------------------
Second, beginning in 2020, the Exchange temporarily suspended the
availability of Floor Broker Interest to be eligible to participate in
the Closing Auction.\43\ The Exchange recently amended its rules to
permanently exclude Floor Broker Interest from the Closing Auction.\44\
Because of the absence of Floor Broker Interest in the Closing Auction,
any remaining information advantage that DMMs might have had with
respect to orders from Floor brokers--even after such interest was
included in the Closing Auction Imbalance Information--has since been
eliminated. Accordingly, one of the information advantages of DMMs that
the Commission cited to in the Disapproval Order no longer exists.
---------------------------------------------------------------------------
\43\ See Securities Exchange Act Release No. 89086 (June 17,
2020), (SR-NYSE-202-52) (Commentary .03 to Rule 7.35B was in effect
on a temporary basis from June 17, 2020 until July 23, 2021, when
the Commission issued the Floor Broker Interest Approval Order).
\44\ See Floor Broker Interest Approval Order, supra note 7.
---------------------------------------------------------------------------
The Exchange believes that this proposed rule change further alters
the balance of DMM obligations compared to the benefits provided to
DMMs with respect to the Closing Auction. The Exchange believes that in
the aggregate, these changes (including the elimination of Floor Broker
Interest) result in a shift that decreases the benefits available to
DMMs without a commensurate decrease in obligations. Specifically, with
this proposed rule change:
<bullet> DMMs must still meet their Rule 104 obligation to
facilitate the Closing Auction and supply liquidity as needed. They
must also select an Auction Price that satisfies all better-priced
orders on the Side of the Imbalance. However, they would now be
systematically restricted as to the price range at which the Closing
Auction Price could be determined. As proposed, if the Side of the
Imbalance is to buy (sell), the Auction Price must be at or above
(below) the last-published Imbalance Reference Price and not above
(below) the last-published non-zero Continuous Book Clearing Price.
Accordingly, with this proposed change, DMMs will be subject to a
further limitation on how they may select the Closing Auction Price. By
contrast, under current rules, there is no express requirement for a
DMM to close a stock within the Continuous Book Clearing Price,
although DMMs are obligated to, among other things, supply liquidity as
needed to facilitate the Closing Auction in a fair and orderly manner.
This proposed change promotes transparency and determinism of the
Closing Auction Price and systematically constrains how a DMM selects a
Closing Auction Price. The Exchange therefore believes that this
proposed change decreases the unique benefits granted to the DMMs
without decreasing the obligations on the DMMs with respect to the
Closing Auction.
<bullet> The only interest that a DMM may enter after the end of
Core Trading Hours to participate in the Closing Auction would be DMM
Auction Liquidity, and such interest could be entered only to offset
Unpaired Quantity at the Auction Price. Such interest is thus
restricted by side, price, and quantity. By contrast, under current
rules, DMMs have no systematic restrictions on entering or cancelling
DMM Interest after the end of Core Trading Hours. This change ensures
that DMM Auction Liquidity could be used only to dampen significant
price movements at the close. The Exchange believes this proposed
change significantly decreases unique benefits to the DMMs because they
would still be required to supply liquidity as needed to support a fair
and orderly Closing Auction, but would have limited tools to enter any
such interest after the end of Core Trading Hours. The Exchange
proposes to make the Closing D Order available to DMMs in part to
offset this reduction of unique benefits with respect to entering or
cancelling DMM Interest after the end of Core Trading Hours. However,
unlike how DMMs currently may enter and cancel DMM Interest, DMMs would
not receive any unique treatment with respect to the availability of
this order type. To the contrary, Closing D Orders for DMMs would
function similarly to Closing D Orders available to Floor brokers,
including that they may not be entered or cancelled in the last ten
seconds of trading and the interest would be included in the Closing
Auction Imbalance Information. Accordingly, the Exchange is not
providing a bespoke tool for DMMs to supply liquidity for the Closing
Auction. In addition, the Exchange proposes to make Closing D Orders
available for a wholly independent reason to provide an incentive for
more broker-dealers to seek to register as a DMM, which would increase
DMM diversity on the Exchange to increase issuer choice.
<bullet> DMM Auction Liquidity entered in connection with
facilitating the Closing Auction would, by its terms, be at-priced
interest and would be allocated after at-priced displayed orders, non-
displayed orders, LOC Orders, and Closing IO Orders. Accordingly,
unlike at-priced DMM Interest under current Rules, it would not have
priority over LOC Orders and Closing IO Orders. While such DMM Auction
Liquidity would have priority over orders with a Yielding Modifier, the
Exchange notes that such orders are, by their terms, conditional in
nature and designed to yield to other orders. Accordingly, DMMs would
have a reduced benefit in connection with Closing Auction
[[Page 52726]]
allocations for their at-priced DMM Auction Liquidity. The Exchange
notes that the proposed allocation of Closing D Orders entered by the
DMM would not provide them with a unique benefit because they would
function similarly to Closing D Orders entered by Floor brokers.
Accordingly, if a Closing D Order is better-priced, it would be
guaranteed to participate in the Closing Auction (subject to DMM-
specific self-trade prevention), just as any other better-priced
interest would be guaranteed an allocation. In addition, that
information would be transparent because such Closing D Orders would be
included in Closing Auction Imbalance Information. DMMs would therefore
not be receiving a unique benefit in this allocation. The Exchange
further believes it is appropriate that at-priced DMM-entered Closing D
Orders in their assigned securities would be allocated on parity as
part of the DMM Participant because DMMs would continue to have a
significant obligation with respect to the Closing Auction, and the
benefit associated with a parity allocation for such orders is designed
to offset that obligation, in part. The Exchange would not propose the
same benefit for Closing D Orders entered by a DMM in securities that
are not assigned to the DMM; in such case, such orders would be
included in the Book Participant, and therefore would not receive any
allocation priority over other market participants.
DMMs would continue to have benefits in connection with their
unique role. For example, at the point of sale, DMMs have access to
aggregated buying and selling interest that is eligible to participate
in the Closing Auction.\45\ However, pursuant to current Rule
104(h)(ii), a DMM may not use any information provided by Exchange
systems in a manner that would violate Exchange rules or federal
securities laws or regulations. In addition, pursuant to current Rule
104(h)(iii), Floor brokers may request that a DMM provide them with the
information that is available to the DMM at the post, including such
aggregated buying and selling interest for the Closing Auction. The
Exchange continues to believe that it benefits the trading community as
a whole to continue to make such information available to DMMs because
Floor brokers who request such market looks can use that information to
provide their customers with information necessary for them to make
trading decisions leading into the close.
---------------------------------------------------------------------------
\45\ As noted above, DMM unit algorithms are not provided
aggregated buying and selling interest for the Closing Auction until
after the end of Core Trading Hours.
---------------------------------------------------------------------------
Providing Closing D Orders to DMMs would also provide them with a
benefit. However, that benefit would not be unique to DMMs, as this
order type is also available to Floor brokers. Because all Floor
brokers operate on an agency-only basis, any market participant can
avail themselves of Floor broker services and use Closing D Orders. The
Exchange also believes that providing Closing D Orders to DMMs is
designed to offset the current significant barriers to entry for new
DMM firms on the Exchange, which is an obligation independent of the
obligations related to the Closing Auction.
In the aggregate, the Exchange believes that the above-described
changes have altered the balance of benefits and obligations for DMMs
and the resulting scope of obligations would no longer be commensurate
with DMM benefits. For example, with respect to the benefits
specifically identified by the Commission in the Disapproval Order,
DMMs no longer have an informational advantage relating to Floor broker
verbal interest at the close and their at-priced DMM Auction Liquidity
would no longer have priority over LOC or Closing IO Orders.
The Exchange believes that as a result of these significant
alterations to DMM obligations and benefits, any current need for
Prohibited Transactions as a DMM obligation has been obviated. As
described by the Commission, Prohibited Transactions provide for a
bright-line rule designed to prevent a DMM from aggressively taking
liquidity and moving prices on the Exchange immediately before the
Closing Auction, and therefore destabilizing the market.\46\ Prohibited
Transactions make sense when a DMM has discretion over the Closing
Auction Price and when a DMM can enter and cancel interest after the
end of Core Trading Hours. However, with the proposed changes described
in this filing, DMM discretion is explicitly limited; the Closing
Auction Price must be within a defined and transparent parameter that
cannot be changed after the end of Core Trading Hours and DMMs would be
limited in what offsetting interest they can enter after the end of
Core Trading Hours. So while the DMM would still have an obligation to
facilitate the Closing Auction and supply liquidity as needed, DMMs
would no longer have the same discretion in how they fulfill this
obligation. As a result, any trading activity that a DMM would engage
in the last ten minutes of trading would be no different than how other
market participants trade leading into the close.
---------------------------------------------------------------------------
\46\ See Disapproval Order at 33536, supra, note 40.
---------------------------------------------------------------------------
Because the Exchange proposes to eliminate Prohibited Transactions,
the Exchange proposes to make a conforming amendment to Rule 98 to
delete subparagraphs (c)(5) and (c)(5)(A) and renumber subparagraphs
(c)(6) and (c)(7) as (c)(5) and (c)(6). The Exchange added Rule
98(c)(5) for the sole purpose of requiring DMMs to provide net position
information in connection with monitoring their compliance with
Prohibited Transactions.\47\ Accordingly, if Prohibited Transactions
are eliminated, that reporting requirement becomes obsolete.
---------------------------------------------------------------------------
\47\ See Securities Exchange Act Release No. 86131 (June 18,
2019), 84 FR 29565 (June 23, 2019) (SR-NYSE-2019-25) (Notice of
filing and immediate effectiveness of proposed rule change). See
also Prohibited Transactions Approval Order, supra note 40.
---------------------------------------------------------------------------
Proposed Non-Substantive Amendments to Rule 104. In addition to
eliminating prohibited transactions, the Exchange proposes to amend
Rule 104 to eliminate obsolete rule text and update rule references,
and make other conforming changes, as follows:
<bullet> The Exchange proposes to amend Rule 104(a)(2) to update
the cross reference from Rule 123D to Rule 7.35A and to use the Pillar
terms of ``Core Open Auctions and Trading Halt Auctions'' instead of
referring to ``openings.'' The Exchange also proposes to delete the
reference to Rule 13 and Reserve Order interest procedures at the
opening as obsolete. Finally, the Exchange proposes to delete the
reference to Supplementary Material .05 to Rule 104 with respect to
odd-lot order information to the DMM unit algorithm, as this is also
obsolete now that the Exchange trades on Pillar.
<bullet> The Exchange proposes to amend Rule 104(a)(3) to update
the cross reference from Rule 123C to Rule 7.35B and to use the Pillar
term of ``Closing Auctions'' instead of ``closes.'' The Exchange also
proposes to delete the reference to Rule 13 and Reserve Order interest
procedures at the close as obsolete.
<bullet> The Exchange proposes to amend Rule 104(b) by deleting
subparagraphs (2) and (6) and replacing the text for Rule 104(b)(2)
with the following: ``Unless otherwise specified in Rule 7.31, DMM unit
algorithms may use the orders and modifiers set forth in Rule 7.31.''
Rule 104(b)(2) currently provides that ``Exchange systems shall enforce
the proper sequencing of incoming orders and algorithmically-generated
messages and will prevent incoming DMM interest from trading with
resting DMM interest. If the incoming DMM
[[Page 52727]]
interest would trade with resting DMM interest only, the incoming DMM
interest will be cancelled. If the incoming DMM interest would trade
with interest other than DMM interest, the resting DMM interest will be
cancelled.'' Since the Exchange transitioned to Pillar, the Exchange no
longer enforces self-trade prevention on behalf of DMMs. Instead, DMMs
may use one of the Self-Trade Prevention Modifiers (``STP'') described
in Rule 7.31(i)(2).
Rule 104(b)(6) currently provides that ``DMM Units may not enter
the following orders and modifiers: Market Orders, MOO Orders, CO
Orders, MOC Orders, LOC Orders, or Buy Minus Zero Plus Instructions.''
In the Pillar rules, Rule 7.31 sets forth which orders and modifiers
are not available to DMMs, and therefore Rule 104(b)(6) is obsolete.
The Exchange believes that the proposed new text for Rule 104(b)(2)
would provide transparency that Rule 7.31 would describe which orders
and modifiers would be available to DMMs, including STP modifiers.
<bullet> The Exchange proposes to amend Rule 104(b)(3) to delete
references to ``Floor broker agency interest files or reserve
interest'' as such references are now obsolete. The Exchange no longer
uses ``Floor broker agency interest files'' and no longer provides
Floor brokers with reserve interest functionality that differs from the
Reserve Orders available to all member organizations, as described in
Rule 7.31.
<bullet> The Exchange proposes to amend Rule 104(b) by deleting
subparagraph (4), which provides that ``[t]he DMM unit's algorithm may
place within Exchange systems trading interest to be known as a
``Capital Commitment Schedule''. (See Rule 1000 concerning the
operation of the Capital Commitment Schedule).'' With the transition to
Pillar, the Exchange has replaced the ``Capital Commitment Schedule''
with Capital Commitment Orders, as described in Rule 7.31(d)(5), and
has deleted Rule 1000. Accordingly, this current rule is obsolete. The
Exchange proposes a non-substantive amendment to renumber Rule
104(b)(5) as Rule 104(b)(4).
<bullet> The Exchange proposes to delete the text accompanying
current Rules 104(c), (d), and (e) as obsolete now that the Exchange
trades on Pillar.
Rule 104(c) currently provides: ``A DMM unit may maintain reserve
interest consistent with Exchange rules governing Reserve Orders. Such
reserve interest is eligible for execution in manual transactions.''
Rule 7.31 now describes how Reserve Orders function.
Rule 104(d) currently provides: ``A DMM unit may provide
algorithmically-generated price improvement to all or part of an
incoming order that can be executed at or within the Exchange BBO
through the use of Capital Commitment Schedule interest (see Rule
1000). Any orders eligible for execution in Exchange systems at the
price of the DMM unit's interest will trade on parity with such
interest, as will any displayed interest representing a d-Quote
enabling such interest to trade at the same price as the DMM unit's
interest.'' As noted above, with Pillar, the Exchange has deleted Rule
1000 and no longer offers the Capital Commitment Schedule to DMMs.
Rule 104(e) currently provides: ``DMM units shall provide contra
side liquidity as needed for the execution of odd-lot quantities that
are eligible to be executed as part of the opening, re-opening and
closing transactions but remain unpaired after the DMM has paired all
other eligible round lot sized interest.'' This requirement is
obsolete.
With these proposed deletions, the Exchange proposes non-
substantive amendments to renumber Rules 104(f), (g), (h), (i), and (j)
as Rules 104(c), (d), (e), (f), and (g) and update cross-references in
proposed Rule 104(e)(iii) from subparagraph (h)(ii) and (iii) to
(e)(ii) and (iii).
<bullet> The Exchange proposes to amend current Rule 104(h)(ii)
(proposed Rule 104(e)(ii)) to delete reference to information that is
no longer available to a DMM at the post. Specifically, the Exchange no
longer provides DMMs at the post with the following information: ``the
price and size of any individual order or Floor broker agency interest
file and the entering and clearing firm information for such order,
except that the display shall exclude any order or portion thereof that
a market participant has elected not to display to a DMM''.
Accordingly, the Exchange proposes to amend Rule 104(e)(ii) to delete
that rule text.
* * * * *
The Exchange proposes that the non-substantive amendments to Rule
104 (not including the proposed elimination of prohibited transactions)
would be operative immediately upon approval of this proposed rule
change. Because of the technology changes associated with the proposed
changes to the Closing Auction process and availability of Closing D
Orders for DMMs, the Exchange proposes that, subject to approval of the
proposed rule change, the Exchange will announce the implementation
date of the remaining proposed rule changes, including the elimination
of prohibited transactions, by Trader Update. Subject to approval of
this proposed rule change, the Exchange anticipates that such changes
will be implemented in the first half of 2022.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\48\ in general, and furthers the objectives of
Sections 6(b)(5) of the Act,\49\ in particular, because it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to, and perfect the mechanisms of,
a free and open market and a national market system and, in general, to
protect investors and the public interest and because it is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78f(b).
\49\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Proposed Changes to Closing Auction Price. The Exchange believes
that the proposed amendment to Rule 7.35B(g) regarding how the Closing
Auction Price would be determined would remove impediments to and
perfect the mechanism of a free and open market and a national market
system because it would promote a more transparent and deterministic
Closing Auction process. Specifically, the proposed change would
require that the DMM determine a Closing Auction Price that is at or
between the last-published Imbalance Reference Price and Continuous
Book Clearing Price. Accordingly, the Closing Auction Price must be
within a pre-determined range of prices that would have been
disseminated via the Closing Auction Imbalance Information and that
cannot be changed after the end of Core Trading Hours. The Exchange
further believes that this proposed parameter is consistent with how
Closing Auction Prices have been determined for the vast majority of
Closing Auctions. For example, in the period January 1, 2021 to July
23, 2021, 96.5% of all Closing Auctions were priced at or between the
last-published Imbalance Reference Price and Continuous Book Clearing
Price. Similarly, during this same period, 94.9% of closing auction
volume priced within these parameters.
Proposed Changes to How DMMs Would Participate in the Closing
Auction. The Exchange believes that the proposed amendments to Rules
[[Page 52728]]
7.35B(a)(2), 7.31(c)(2)(C), and 7.35(a)(9) regarding how DMMs would
participate in the Closing Auction would remove impediments to and
perfect the mechanism of a free and open market and a national market
system because the proposed changes would promote transparency and
determinism regarding the Closing Auction process by eliminating DMMs'
ability to cancel interest after the end of Core Trading Hours and
limiting their ability to enter interest after the end of Core Trading
Hours. As a result of the proposed changes, DMMs would no longer have
discretion after the end of Core Trading Hours to enter or cancel DMM
Interest, which could potentially impact the Closing Auction Price.
Instead, as proposed, DMMs would be able to meet their obligation under
Rule 104(a)(3) to supply liquidity as needed by either entering Closing
D Orders before the end of Core Trading Hours or entering DMM Auction
Liquidity after the end of Core Trading Hours, but only to offset
Unpaired Quantity at the Closing Auction Price (which must be within a
predetermined range, as described above). Accordingly, with these
proposed changes, a DMM could enter DMM Auction Liquidity after the end
of Core Trading Hours only to close a security at a price that is at or
closer to the Imbalance Reference Price than the published Continuous
Book Clearing Price.
The Exchange believes that making Closing D Orders available to
DMMs would remove impediments to and perfect the mechanism of a free
and open market and a national market system because they would provide
DMMs with a replacement mechanism both to meet their ongoing Rule
104(a)(3) obligations with respect to the Closing Auction to contribute
their own capital to supply liquidity as needed to assist in the
maintenance of a fair and orderly market and to manage the risk of the
DMM. The Exchange further believes that it would promote transparency
and determinism to the Closing Auction process for DMMs to enter their
interest before the end of Core Trading Hours. Specifically, the
Exchange proposes that Closing D Orders entered by a DMM would be
included in the Closing Auction Imbalance Information at their
undisplayed discretionary price beginning five minutes before the end
of Core Trading Hours, which is when Closing D Orders entered by Floor
brokers are included in the Closing Auction Imbalance Information. With
this change, Closing D Orders entered by DMMs would be reflected in the
Closing Auction Imbalance Information, which is not the case for DMM
Interest currently entered or cancelled after the end of Core Trading
Hours. Market participants would be able to respond to any changes in
the Closing Auction Imbalance Information that may result from Closing
D Orders entered by DMMs by entering interest into the continuous order
book or retaining the services of a Floor broker to enter Closing D
Orders on their behalf.
In addition, Closing D Orders are not novel and the Exchange
proposes that they would function for DMMs in a similar manner as they
currently function for Floor brokers, with only two substantive
differences. First, DMMs could not combine a Yielding Modifier with a
Closing D Order. The Yielding Modifier is not necessary for DMMs
because their transactions on the Exchange are as a dealer acting in
the capacity as a market maker, and therefore they are not subject to
the trading prohibitions specified in Section 11(a) of the Act.\50\
Second, Closing D Orders entered by a DMM in NYSE-listed securities
would not be able to participate in a Core Open Auction or Trading Halt
Auction. Because the purpose of providing Closing D Orders to DMMs is
to provide them with a tool to participate in Closing Auctions, the
Exchange does not believe that Closing D Orders entered by DMMs in
NYSE-listed securities would need to participate in a Core Open Auction
or Trading Halt Auction on the Exchange.
---------------------------------------------------------------------------
\50\ See supra note 26.
---------------------------------------------------------------------------
The Exchange further believes that providing DMMs with the ability
to enter Closing D Orders in securities that trade on the Exchange,
including UTP Securities, that are not assigned to them as a DMM, would
remove impediments to and perfect the mechanism of a free and open
market and a national market system and support the maintenance of a
fair and orderly market because it would provide a mechanism for DMMs
to enter such orders directly. Currently, a DMM may choose to use a
Floor broker to enter Closing D Orders in securities that have not been
assigned to that DMM. The Exchange believes that allowing DMMs to enter
Closing D Orders directly would reduce operational complexity and cost
for DMMs, thereby creating an incentive for additional firms to
register as a DMM. This proposed change would also make it easier for
regulatory staff to monitor DMM trading activity on the Exchange.
In addition, the Exchange believes that making this order type
available to DMMs for all securities that trade on the Exchange would
provide an incentive for additional broker-dealers to register as a DMM
on the Exchange. Specifically, the Exchange believes that providing
potential new DMM entrants with additional opportunities to provide
liquidity across all securities that trade on the Exchange may serve as
an incentive for new entrants to undertake the costs to register as a
DMM unit without a significant roster of allocated securities. The
Exchange further believes that promoting diversity of DMMs would remove
impediments to and perfect the mechanism of a free and open market and
a national market system by providing issuers with additional choice in
their DMM assignments.
The Exchange believes that the proposed amendments to Rule
7.35(a)(9)(B) and (C) would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because they would promote clarity and transparency regarding the terms
``DMM Order'' and ``DMM Auction Liquidity'' in a manner designed to
conform to the substantive changes to how DMMs would participate in the
Closing Auction. The Exchange further believes that the proposed
amendment to Rule 7.35B(j)(2)(A)(iii) would similarly remove
impediments to and perfect the mechanism of a free and open market and
a national market system because the proposed amendment is consistent
with the proposal that DMM Orders would not be eligible to participate
in a Closing Auction; if a DMM were permitted to enter DMM Orders
during a Solicitation Period under that Rule, such orders would need to
be cancelled before the Closing Auction, per proposed changes to Rule
7.35B(a)(2).
DMM Interest Allocation in the Closing Auction. The Exchange
believes that the proposed amendments to Rule 7.35B(h) to change how
DMM Interest, including Closing D Orders entered by a DMM, would be
allocated in a Closing Auction, would remove impediments to and perfect
the mechanism of a free and open market and a national market system
because the proposed changes are designed to process DMM Interest
consistent with the role of the DMM in a particular Closing Auction:
<bullet> The Exchange believes that amending Rule 7.35B(h)(1) to
provide that better-priced Closing D Orders entered by a DMM would be
guaranteed to participate in the Closing Auction (subject to DMM-
specific self-trade prevention) would promote a fair and orderly
Closing Auction process because better-priced DMM Closing D Orders
would not receive a different allocation opportunity from other
Participants that
[[Page 52729]]
have entered better-priced interest; all better-priced interest is
guaranteed to participate in the Closing Auction. In addition, because
DMMs would be entering Closing D Orders before the end of Core Trading
Hours and such interest would be included in the Closing Auction
Imbalance Information, if they are better-priced orders, the Exchange
believes that should be included in the Closing Auction in the same
manner that all other better-priced orders entered by other member
organizations are allocated in the Closing Auction. Accordingly, DMMs
would not be receiving a unique benefit as a result of this proposed
allocation.
<bullet> The Exchange believes that amending Rule 7.35B(h)(2)(A) to
provide that at-priced Closing D Orders in securities that are assigned
to the DMM would be included in the DMM Participant allocation would
promote a fair and orderly Closing Auction process because it is
consistent with the current allocation of at-priced DMM Interest in the
Closing Auction, and therefore it is not novel. This benefit is
designed to offset the DMM's significant obligation to facilitate the
Closing Auction and supply liquidity as needed. The Exchange further
notes that the proposed amendment would allow this at-priced DMM
Participant allocation only for Closing D Orders, which, by their
terms, must be entered before the end of Core Trading Hours and would
be included in the Closing Auction Imbalance Information. Accordingly,
this proposed allocation would be consistent with how Closing D Orders
are currently allocated for Floor brokers in the Closing Auction
because they would be allocated as part of the allocation of orders
ranked Priority 2--Display Orders, which currently get an allocation
opportunity before orders ranked Priority 3--Non-Display Orders and LOC
Orders. The Exchange likewise believes that the proposal that at-priced
Closing D Orders entered by DMMs in securities not assigned to the DMM
be included in the Book Participant would be consistent with existing
Rules because in such case, the member organization entering such
orders would not be functioning as a DMM, and therefore would not be
eligible for a DMM Participant allocation for such orders.
<bullet> The Exchange believes that amending Rule 7.35B(h)(2) to
add new sub-paragraph (E) describing how DMM Auction Liquidity would be
allocated would promote a fair and orderly Closing Auction process.
Specifically, because DMM Auction Liquidity could be entered only to
offset Unpaired Quantity at the Closing Auction Price, the Exchange
does not believe that such interest should get an allocation benefit.
Accordingly, DMM Auction Liquidity would be allocated after not only
displayed and non-displayed orders, but also after LOC Orders and
Closing IO Orders. The Exchange further believes providing DMM Auction
Liquidity with an allocation opportunity before orders ranked Priority
4--Yielding Orders would be consistent with a fair and orderly market
because orders with a Yielding Modifier are, by their terms, intended
to yield to other available interest and not guaranteed an execution in
the Closing Auction. Because DMM Auction Liquidity would have an
allocation opportunity before orders with a Yielding Modifier, the
Exchange further believes it would be consistent with a fair and
orderly Closing Auction process to not include offsetting Yielding
Orders in the calculation of Unpaired Quantity that a DMM would be
permitted to offset with DMM Auction Liquidity.
<bullet> The Exchange believes that deleting the text currently set
forth in Rule 7.35B(h)(3)(A) and replacing it with a description of how
self-trade prevention would be applied within the DMM Participant
Allocation would remove impediments to and perfect the mechanism of a
free and open market and a national market system because it would
promote transparency of the circumstances of when and how DMM Interest
would be decremented and cancelled to prevent a self-trade between
Closing D Order(s) to buy (sell) entered by a DMM and DMM Auction
Liquidity to sell (buy). By applying STPD, the Exchange believes that
the proposed mechanism would reduce the impact of such cancellation on
the Closing Auction Price.
Exchange-Facilitated Auctions. The Exchange believes that the
proposed amendment to Rule 7.35C(a)(1) would remove impediments to and
perfect the mechanism of a free and open market and a national market
system because it would allow for Closing D Orders entered by DMMs,
which would be entered before the end of Core Trading Hours, to
participate in an Exchange-facilitated Closing Auction. Currently,
Closing D Orders entered by Floor brokers are eligible to participate
in an Exchange-facilitated Closing Auction, and the Exchange believes
that Closing D Orders entered by DMMs should not be processed
differently.
Prohibited Transactions. The Exchange believes that the proposed
changes to the Closing Auction process, combined with the elimination
of Floor Broker Interest in the Closing Auction, would significantly
alter the balance of benefits and obligations for DMMs and the
resulting scope of obligations would no longer be commensurate with DMM
benefits. The Exchange therefore believes that eliminating Prohibited
Transactions would remove impediments to and perfect the mechanism of a
free and open market and a national system and would promote just and
equitable principles of trade because, as a result of the proposed
changes, DMMs' unique benefits vis-[agrave]-vis the Closing Auction
process would be significantly altered, obviating the need for
Prohibited Transactions. Specifically:
<bullet> DMMs would still have the obligation to select a Closing
Auction Price that satisfies all better-priced orders on the Side of
the Imbalance and supply liquidity as needed to facilitate a fair and
orderly Closing Auction Process. However, as proposed, the DMM would
now be systematically restricted as to the price range at which the
Closing Auction Price could be determined and therefore DMMs would be
subject to a further limitation on how they may select the Closing
Auction Price. Accordingly, the Exchange believes this proposed change
would maintain obligations on DMMs with respect to the Closing Auction
while decreasing the tools available to meet those obligations.
<bullet> DMMs would no longer have discretion after the end of Core
Trading Hours to enter or cancel DMM Interest. Instead, as proposed,
after the end of Core Trading Hours, DMMs would be able to enter only
DMM Auction Liquidity and could enter such interest only at pre-
determined price ranges and only if such interest would offset Unpaired
Quantity at those pre-determined price ranges. Accordingly, such
interest would be systematically restricted by side, price, and
quantity. This change ensures that DMM Auction Liquidity could be used
only to dampen significant price movements at the close. The Exchange
believes this proposed change significantly decreases unique benefits
to the DMMs because they would still be required to supply liquidity as
needed to support a fair and orderly Closing Auction, but would have
limited tools to enter any such interest after the end of Core Trading
Hours.
<bullet> The Exchange proposes to make the Closing D Order
available to DMMs in part to offset this reduction of unique benefits
with respect to entering or cancelling DMM Interest after the end of
Core Trading Hours. However, unlike how DMMs currently may enter and
cancel DMM Interest, DMMs would not receive any unique treatment with
[[Page 52730]]
respect to the availability of this order type. To the contrary,
Closing D Orders for DMMs would function similarly to Closing D Orders
available to Floor brokers, including that they may not be entered or
cancelled in the last ten seconds of trading and the interest would be
included in the Closing Auction Imbalance Information. Accordingly, the
Exchange is not providing a bespoke tool for DMMs to supply liquidity
for the Closing Auction. In addition, the Exchange proposes to make
Closing D Orders available for a wholly independent reason to provide
an incentive for more broker-dealers to seek to register as a DMM,
which would increase DMM diversity on the Exchange to increase issuer
choice. In addition, the proposed allocation of Closing D Orders
entered by the DMM would not provide them with a unique benefit because
they would function similarly to Closing D Orders entered by Floor
brokers. Accordingly, if a Closing D Order is better-priced, it would
be guaranteed to participate in the Closing Auction (subject to DMM-
specific self-trade prevention), just as any other better-priced
interest would be guaranteed an allocation. In addition, that
information would be transparent because such Closing D Orders would be
included in Closing Auction Imbalance Information. DMMs would therefore
not be receiving a unique benefit in this allocation
<bullet> DMM Auction Liquidity entered in connection with
facilitating the Closing Auction would, by its terms, be at-priced
interest and would be allocated after at-priced displayed orders, non-
displayed orders, LOC Orders, and Closing IO Orders. Accordingly,
unlike at-priced DMM Interest under current Rules, it would not have
priority over LOC Orders and Closing IO Orders. While such DMM Auction
Liquidity would have priority over orders with a Yielding Modifier, the
Exchange notes that such orders are, by their terms, conditional in
nature and designed to yield to other orders. Accordingly, DMMs would
have a reduced benefit in connection with Closing Auction allocations
for their at-priced DMM Auction Liquidity.
In the aggregate, the Exchange believes that the above-described
changes have altered the balance of benefits and obligations for DMMs
and the resulting scope of obligations would no longer be commensurate
with DMM benefits. For example, with respect to the benefits
specifically identified by the Commission in the Disapproval Order,
DMMs no longer have an informational advantage relating to Floor broker
verbal interest at the close and their at-priced DMM Auction Liquidity
would no longer have priority over LOC or Closing IO Orders.
The Exchange believes that, as a result of these significant
alterations to DMM obligations and benefits, any current need for
Prohibited Transactions as a DMM obligation would be obviated. As
described by the Commission, Prohibited Transactions provide for a
bright-line rule designed to prevent a DMM from aggressively taking
liquidity and moving prices on the Exchange immediately before the
Closing Auction, and therefore destabilizing the market.\51\ Prohibited
Transactions make sense when a DMM has discretion over the Closing
Auction Price and when a DMM can enter and cancel interest after the
end of Core Trading Hours. However, with the proposed changes described
in this filing, DMM discretion is explicitly limited; the Closing
Auction Price must be within a defined and transparent parameter that
cannot be changed after the end of Core Trading Hours and DMMs would be
limited in what offsetting interest they can enter after the end of
Core Trading Hours. So, while the DMM would still have an obligation to
facilitate the Closing Auction and supply liquidity as needed, DMMs
would no longer have the same discretion in how they fulfill this
obligation. As a result, any trading activity that a DMM would engage
in the last ten minutes of trading would be no different than how other
market participants trade leading into the close.
---------------------------------------------------------------------------
\51\ See Disapproval Order at 33536, supra, note 40.
---------------------------------------------------------------------------
The Exchange notes that in the absence of Prohibited Transactions,
if a DMM engages in an Aggressing Transaction in the last ten minutes
of trading, the DMM would be subject to the re-entry obligations
specified in current Rule 104(g)(2) (proposed Rule 104(d)(2)).
Accordingly, DMMs would continue to be subject to a unique obligation
in the last ten minutes of trading that would not be applicable to any
other member organizations trading on the Exchange. To the extent a DMM
engages in an Aggressing Transaction in the last ten minutes of
trading, such re-entry obligation would dampen any potential
destabilizing impact of such Aggressing Transaction.
Finally, the Exchange believes that the proposed amendments to Rule
98 to delete sub-paragraphs (c)(5) and (c)(5)(A) and renumber
subparagraphs (c)(6) and (c)(7) as (c)(5) and (c)(6) would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because the Exchange added Rule 98(c)(5) for
the sole purpose of requiring DMMs to provide net position information
in connection with monitoring their compliance with Prohibited
Transactions.\52\ Accordingly, because the Exchange is proposing to
eliminate Prohibited Transactions, the related reporting requirement
becomes obsolete.
---------------------------------------------------------------------------
\52\ See supra note 46.
---------------------------------------------------------------------------
Proposed Non-Substantive Amendments to Rule 104. The Exchange
believes that the proposed non-substantive amendments to Rule 104 would
remove impediments to and perfect the mechanism of a free and open
market and a national market system because the proposed changes are
designed to eliminate obsolete rule text, update rule references to
reflect Pillar functionality, and make other conforming changes.
Specifically, the Exchange proposes to eliminate references to pre-
Pillar Rules and trading functionality, including references to Rules
123D, 123C, Rule 1000, the Capital Commitment Schedule, Floor broker
agency interest files, odd-lot orders in the close, and self-trade
prevention. The Exchange also proposes to update Rule 104(b) to cross
reference Rule 7.31 to determine which orders and modifiers are
available to DMMs, rather than separately (and duplicatively) including
this description in Rule 104. The Exchange also proposes to update
current Rule 104(h)(ii) (proposed Rule 104(e)(ii)) to delete reference
to information that is no longer available to DMM at the post. The
Exchange believes that these proposed amendments will promote
transparency and clarity in Exchange rules regarding how DMMs function
on the Exchange, including what information is available to them at the
post.
The Exchange further believes that the proposed non-substantive
amendments to Rules 7.35B(j)(2) and 7.35B(j)(2)(A)(iii) to eliminate
references to Floor broker interest and oral interest entered by Floor
brokers at the close would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because these proposed changes are designed to conform Exchange rules
to the changes described in the Floor Broker Interest Approval Order.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\53\ the Exchange
believes that the proposed rule change would not impose any burden on
competition that is not necessary or appropriate in furtherance
[[Page 52731]]
of the purposes of the Act. The proposed change is designed to revise
the Closing Auction process on the Exchange to make it more transparent
and deterministic, while still retaining the DMM market model. The
Exchange believes that the proposed rule change would promote
intermarket competition, particularly for issuers in connection with
their determination of which exchange to select as a primary listing
exchange. The Exchange does not believe that the proposed rule change
would impose any burden on intra-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act
because they are designed to address the DMM's unique role at the
Exchange, including the DMM's Rule 104(a)(3) obligation to facilitate
the Closing Auction by supplying liquidity as needed for a fair and
orderly Closing Auction. The proposed changes are designed to make the
process more transparent and deterministic. The proposed changes would
also result in reducing the overall DMM benefits because they would
eliminate discretion regarding DMM Interest entered or cancelled after
the end of Core Trading Hours and require that the DMM select a Closing
Auction Price from within a pre-determined and transparency range of
prices.
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#3745425b521a54585a5a525943447744525419505841"><span class="__cf_email__" data-cfemail="bdcfc8d1d890ded2d0d0d8d3c9cefdced8de93dad2cb">[email protected]</span></a>. Please include
File Number SR-NYSE-2021-44 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2021-44. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly.
All submissions should refer to File Number SR-NYSE-2021-44 and
should be submitted on or before October 13, 2021.
---------------------------------------------------------------------------
\54\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-20448 Filed 9-21-21; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on September 22, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.